There are thousands of investment techniques to choose from. Today, we are going to show you one of our favorites.

This technique let’s you invest in penny stocks practically for free. It’s a two-part system that should protect you in all markets, without limiting your returns. This simple system is based on both income investing and high growth investing.

To start, you have to figure out how much of your money you are willing to part with for a few years. This money will be tied up, so be sure not to use the cash you need to pay next month’s mortgage.

Your best bet is to start a separate online account to handle this portfolio. You must make sure that you don’t continue to pour all of your savings into it — just as much as you can stand to lose.

Once you do that, you need to put all or nearly all of your new account’s money into income stocks. By income, we mean stocks that pay out dividends to shareholders.

Many blue chips pay dividends to entice investors seeking cash as you go. Companies like McDonalds and Wal-Mart cut dividend checks to investors every quarter. Some pay less, and others pay as often as monthly.

When deciding which companies to invest in, there are a number of questions you need to ask yourself:

Question to Ask: How much will this company pay through dividends?
Why the Answer is Important: For the sake of this technique, you want companies that pay a higher percentage. To find this, look for companies with dividend yields above 7%. That means, every year the company will pay at least $700 for every $10,000 invested.

Question to Ask: Is the company growing its dividend?
Why the Answer is Important: A growing dividend can lead to larger payments the longer you are invested. It also shows the company is strong and growing.

Question to Ask: How strong is the company’s financial health?
Why the Answer is Important: If the company is struggling to make money, you can bet that they’ll eventually stop paying dividends. That would leave you without the income you need for Step Two.

These are the basic questions you need to ask yourself in the first step of this system.

Once you find a few companies that you feel comfortable in, you are ready for step two. This is where the big money comes in…

Fast-forward a few months after your initial income investments. You should start receiving dividend checks. With that money, you can use it how you want. But to truly take advantage of this system, you should take it and invest in penny stocks.

That’s right, be aggressive. You don’t have to take any money out of your initial income investments, so these dividends are more or less fair game. Make the most of it.

If you like a small component maker in the tech industry, go ahead and put some of your dividend money in it. Find a junior exploration miner that you like? Buy some shares of it.

After awhile, you’ll find yourself with a fairly even portfolio. You’ll have safe income plays along side your high-risk, high-reward penny stocks. As the income payments grow, so do your penny stock investments.

This system gives you more than just a growing portfolio. It gives you safety in bear markets like this one, and profit potential in bull markets.

You see, income investments typically perform better in bear markets because of their stable dividend plans. Investors, with nowhere left to turn, will look for ways to profit even if stocks go down. These investors put their money in dividend payers to collect those payments, while the market finds a bottom.

You’ll benefit from this flood of investment. It’s certainly not going to push shares up to astronomical prices, but it does deliver safety in falling markets.

Then, when stocks begin to recover, those investors will be buying aggressive stocks, such as your penny stocks. That will push prices up to astronomical heights. You benefit from both the safety of your income stocks, and the potential gains of your penny stocks.

While this sounds like the perfect way to invest, the most difficult part — as always — is finding the right companies to invest in.

But, if you do it right, you’ll be practically bulletproof in all markets.

Sincerely,
Jim Nelson

October 31, 2008

P.S.: Over the next few weeks, we’ll be sending you a report that outlines a detailed income investing strategy. It will be called Retirement Plan B and it will take an in-depth look at the world of dividend stocks.

Jim Nelson

Jim Nelson is the managing editor of Penny Sleuth. He has been playing the stock market since he was 14, always with a preference toward smaller companies. He has honed his stock picking skills at Agora Financial since 2004, effectively combining a growth and value approach. Like Greg Guenthner, Jim also contributes to Penny Stock Fortunes on top of bringing you the Penny Sleuth every weekday.

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Dividend Stocks in Today’s Market (Dividends Value, 11/2/08)

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